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Simple Subscriptions Out, Flexibility to Monetize XaaS In

The next evolution is to reach per-use, elastic pricing for XaaS

In the last MetraTech blog, we explored the topic of how you price for cloud and other services. In this blog, we focus on the everything-as-a-service (XaaS) movement and the impact on current pricing and business models. While the cloud industry is heavily impacted by this trend, it is by no means alone. The cloud represents a radical business model change for those vendors that were not born into it. We've all seen the mass confusion out there about how to monetize cloud business models and in the process of figuring it out, service commoditization. But like all massive market changes, once the dust settles, a new player takes control. After all, Amazon didn't exist as a cloud provider until relatively recently. It is important to focus on what it will take to unseat the market leaders and we all know price alone is a race to the bottom where even the winner loses. I can recall a quote from the CEO of one of the largest software companies in the world who famously said at an analyst conference in September 2008 (yes less than five years ago), "the interesting thing about cloud computing is that we've redefined cloud computing to include everything that we already do. [...] The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?" Of course at that same analyst conference, he also admitted that his company would start selling cloud services, too. And therein lies part of the problem, there is a fundamental sea change afoot that requires a new way, a better way. Not the old way.

Sometimes it is important to focus on other industries and the business models they are innovating and bringing to market to see the inevitable evolution occurring right in front of us. Companies that discover the importance of providing differentiated cloud services that are flexible enough to pivot based on customer/partner/competitor/ market behavior and provide service innovation through partner services wrapped around their own are innovators, we can learn from. While many might say otherwise, the cloud is still in its infancy stage and being reshaped before our very eyes. Those that have the vision to shape it, all I can say is...watch out market leaders.

If we look at what is happening in other industries, it provides a foreshadowing of what is happening in cloud and many other verticals. Today, wind turbines, locomotives, jet engines and networking routers are all examples of "products" that are now being sold as a "service." At the recent Cloud Computing event in New York, the CTO of GE indicated that 70% of revenue now comes from selling as a service what used to be products. Unlike most technology companies, GE is broadly diverse and works in energy, healthcare, financial services, transportation, and media and sells everything from aircraft engines to power generation to financial services, medical imaging, and television programming.

The jet engine use case serves as the perfect illustrative example of the as a service movement. We all know that the jet engine is a very complex product which is why airlines have a separate agreement with an engine maintenance provider, usually the same company producing the actual jet engines. It might come as a surprise that usage is used to determine jet engine costs and that this model has been pioneered to a truly compelling customer value proposition. Rolls-Royce came up with the Power-By-The-Hour concept: provide a service for exactly the same products, but charge customers per flying hour of the engine. It is worth noting that Rolls-Royce introduced this business model about 50 years ago, before the term Cloud even existed. Why is this differentiated service so valued by customers? And how can other service industries learn from it?

The actual business case is very straightforward for the end-customer. Airlines have a difficult time forecasting how often equipment will break down. Additionally, the cost of repair and stocking spare parts is also not desirable. Ultimately, all the airline really wants is the engine to fly. That is precisely what the Rolls-Royce Power-by-the-Hour contract offers: customers buy a flying engine and not spare parts. In contrast, a company selling you parts and labor has a direct incentive to sell you more parts and labor. We all have personal stories about car repairs and going into the dealership with x problem, and coming out with x and y and the requisite bill. Under the Power-by-the-Hour this does not happen: both the service provider and the customer have a common goal and commitment to the flying engine. The service provider is actually incentivized to try to perform more proactive maintenance (flying time is money and downtime is not) or maybe even to design a better engine. This is a classic case of both the customer and the service provider winning.

Subscriptions have been a rudimentary model on the path to reducing the incremental cost of products and services, and it stands to reason that the next evolution is to reach per-use, elastic pricing for XaaS. The evolution of today's subscription services to ones that factor in the concept of a win-win and two-way commitment for both the provider and the customer vs. today's one size fits all, and hope for the best model, is logical.

Many customers want the flexibility to buy the same underlying service in either a subscription or completely consumption-based model depending on their specific use of that service. For example, for compute services, customers often want subscription-based for long-running applications in order to predict costs whereas they want 100 percent usage-based for Big Data and quality assurance loads. However, even in the subscription model they want to be able to support rules-based bursting. Billing must support pricing models for service building blocks, tailoring, subscriptions and consumption. Billing systems that force providers to compromise business models around price, term or product mix to fit into the cookie-cutter system leads to service commoditization and customer relationships that are not personalized. If that is your chosen go-to-market approach you may as well forget about unseating the market leaders.

More Stories By Esmeralda Swartz

Esmeralda Swartz is VP, Marketing Enterprise and Cloud, BUSS. She has spent 15 years as a marketing, product management, and business development technology executive bringing disruptive technologies and companies to market. Esmeralda was CMO of MetraTech, now part of Ericsson. At MetraTech, Esmeralda was responsible for go-to-market strategy and execution for enterprise and SaaS products, product management, business development and partner programs. Prior to MetraTech, Esmeralda was co-founder, Vice President of Marketing and Business Development at Lightwolf Technologies, a big data management startup. She was previously co-founder and Senior Vice President of Marketing and Business Development of Soapstone Networks, a developer of resource and service control software, now part of Extreme Networks.

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